Is Citi's new tax plan a poison pill in disguise?
Announced yesterday, the "tax benefit preservation plan" was overshadowed by Citi's $58 billion exchange of preferred shares for common equity. But it's significant because it could serve as "a convenient way to avoid the possibility of other investors amassing a large stake in the company," wrote CreditSights analyst David Hendler in a note to clients.
The plan is designed to discourage any investor from holding more than five percent of Citi's stock, the company said in a statement. It works by giving the company's other shareholders the right to buy stock cheaply if an investor crosses that threshold. If enough do so, it could reduce the offending investor's stake.
It's important, Citi said, because it may not be able legally to use its enormous backlog of tax breaks if any individual investors build big stakes in the company.
"Deferred tax assets," as the breaks are known, may sound esoteric, but preserving them is a huge deal for Citi. As of March 31, it had about $43.5 billion worth of deferred tax assets in the form of unused credits and deductions that could be deployed to offset future federal, state and foreign tax liabilities, according to regulatory filings.
Citi says the plan exists to protect those assets, but it's structured much like a poison pill, as provisions companies adopt to make it harder for outsiders to stage hostile takeovers are known. They're frowned on by shareholder advocates because using them to deter corporate raiders protects executives while diluting investors' stakes.
Citi spokesman Alex Samuelson said the plan wasn't a poison pill. It wouldn't prevent someone from making a bid to buy the company outright, usually one of the chief aims of such provisions, he said. The plan exists simply to protect "part of the capital structure."
In his research note, Hendler wrote, "Citi explained to us that the plan was mainly to prevent a buyer from going over the five percent threshold by 'accident.'"
"Still," he continued, "we remain somewhat skeptical of this explanation as it seems unlikely to us that a holder would accidentally amass a substantial stake in the company."